Liquidation of Company Accounting
Liquidation is the process of settling any liabilities, selling all assets of an entity, taking the remaining funds and distributing them to shareholders.3 min read updated on February 01, 2023
The liquidation of company accounting occurs in businesses that are ending operations. Liquidation is the process of settling any liabilities, selling all assets of an entity, taking the remaining funds and distributing them to shareholders, and closing the legal entity down. Since a business is created by law, it can't die on its own, so it must be ended through a liquidation. The liquidation of a company, also known as winding up, is defined as the method where the business's affairs are stopped so a liquidator can be in charge of all liabilities and assets.
What Does a Liquidator Do?
A liquidator, also known as an administrator, gets appointed to take over the company. They'll collect the assets, pay any debts, and distribute the remaining surplus among members based on their rights. This happens when the business is dissolved in compliance with the formalities stated in the company's ordinance. Part of the role of a liquidator is to look into any company affairs in case they need to recover the assets of a business that have been sold or misplaced at a price that's less than market value.
Reasons Why a Company Would Liquidate
The main reason a company decides to liquidate their assets is because of insolvency. This means a company gets to a point where it can't make necessary payments on time. Liquidation converts all business assets to cash, and payments can then be made with this. You might be forced to go through liquidation if the company isn't solvent anymore. If it stays solvent, it can be controlled by the company's directors. When it's insolvent, a liquidator is put in charge of the business.
They'll then be responsible for the details of winding up the company or the liquidation. If a company is considered insolvent, all assets that remain are sold off so the remaining creditors can be paid. Any amount that's left over after the required payments have been made will be distributed among the shareholders.
Three Kinds of Liquidation
It may seem like a liquidation is fairly straightforward, but there are three types of circumstances where a company gets sent into liquidation. For each type, a certain process must be followed. The first type is compulsory by the court. If a company is established and registered under an ordinance, it might get wound up by the court. This is also known as compulsory winding up. The following are other reasons this might happen:
- If a company passes a special resolution
- If the company can't fully pay its debts and the director applies to the court to ask that the liquidation process is started
- If a company does any illegal business
- If accounts aren't maintained
- If a statutory report isn't submitted to the registrar
- If the company can't start after a year of being incorporated
Sometimes, a business owner might decide to end the company for certain reasons. The company might still be able to make its payments by the deadline due to voluntary liquidation. It's up to the business partners or owners to wind up. This happens when the company's director recognizes that the business won't be able to pay off its debts and can start the liquidation process after they hold a vote among the shareholders. If more than 75 percent of the shareholders decide to liquidate, the process may begin.
The main point of a voluntary winding is the creditors and the company will settle their problems without taking it to court. However, they may apply for directions to the court and order if it's necessary. This can also happen when a certain period of time for the company expires or if the business passes a resolution voluntarily. Sometimes the company's Articles of Incorporation will state that when a specific event occurs, the business must close.
The third reason for liquidation can be when there is winding up that happens under a court's supervision. If a company passes an extraordinary or special resolution for the winding up or liquidation, the court passes an order on the creditors' or contributors' applications for closing a business under a court's supervision.
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